How to Negotiate a Deal When It’s Under Contract

David:
This is the BiggerPockets Podcast show 891. What’s going on everyone? This is David Green, your host of the BiggerPockets podcast here today with my partner in crime, Rob Abasolo.

Rob:
Hello. Yes, David. There could not be an episode of BiggerPockets that is more in your wheelhouse today because we are calling today’s episode How to Negotiate a Deal when Under Contract. And boy, have I seen you not only do this, but do it masterfully. So, I’m so excited to share some of your tips and strategies that I’ve personally learned from you for everyone at home.

David:
That’s right. Today, we’re going to be talking about all the levers and pulleys that can be pulled on once you’re under contract to get a better deal for yourself. You’re also going to learn about the options that you have as a buyer in the negotiation process, which can save you money and headaches down the line. And most importantly, these are things that most agents themselves unfortunately don’t know. So, you can use this information to help educate your agent, or if you are an agent, this show should have a lot of good information for you.

Rob:
All right. Well let’s get into it, David. And I want to backtrack a little bit first and let’s just get back to basics here before we jump into some of the mechanics with negotiations and all that good stuff. Can you just generally explain for everyone at home that may be new to the real estate process, what it means to be under contract?

David:
Great question there. Under contract is the term that we use once a seller has agreed to a buyer’s offer and all parties have signed off on that offer, the offer is going to dictate the terms of the escrow. So basically, a buyer says, “Hey, I will buy your house for this much money under these conditions.” Now, most offers come with ways that a buyer can back out of the deal, but the seller cannot back out of the deal in almost every single case, there’s very rare exceptions. And most buyers back out because of three reasons. They do an inspection on the home or they inspect the home, they look at the rents, they look at the neighborhood, they look at the area. Heck, they see that one of the fence boards isn’t the same color as the other ones. It doesn’t take much and they choose to back out of the deal after inspecting it.
They also get an appraisal on the home if they’re going to be using a loan to buy it. And if that appraisal comes in for less than what the buyer offered, they can back out for that reason. And lastly, if their loan falls apart and they’re not able to secure the financing for the property, they can back out for that reason. When I say back out, a buyer could always back out, but they can back out and get their deposit back. We often call this earnest money deposit or an EMD. So, after an offer is accepted, the buyer sends their earnest money deposit into an escrow where it’s held by a neutral third party, and if they back out without a contingency in place, like I just mentioned, the seller would get to keep the deposit. But if they back out with one of those contingencies in place, then they get to have their deposit returned.

Rob:
All right, so today’s episode is called How to Negotiate a Deal When Under a Contract. That would seem to imply that there are two layers of negotiation. There’s before and there’s after. So, what it sounds like is even after you close on a contract, there’s still a whole another, I don’t know, dimension of negotiation that’s going to go on.

David:
That’s exactly right. So, when you send your first offer to a seller, the seller has a couple of options. They can just not reply to it at all. They don’t have to. They can send you a counter offer and say, “Well, I want the offer to be better for me.” Usually, this means increasing the purchase price, but maybe they decrease the amount of time that you as a buyer have to perform those inspections or get that appraisal back. Maybe they want to hire earnest money deposit or maybe they want a period of time to rent the home back from you. They have the option to counter your offer with some adjustments of their own. Or what happens in today’s market a lot is the seller will send out what is called seller multiple counter offer, or every state has their own version of it.
But basically, they’re saying, “Look, you’re one of several offers. Come back with a better offer and I’m going to let you decide how you want to do that.” This is where the term highest of best comes from. “Send me another offer with your highest price and your best terms.” Or occasionally a seller may say, “All right, well I’m going to send this seller multiple counter to everybody,” and it says, “If you’re willing to pay X amount under these conditions, whoever replies to me first is the one that gets the house.”

Rob:
Got it. Okay. So, most people get that offer accepted and they’re like, “Ooh, home free.” But then, there’s a whole another level of negotiation where I think things actually get a little bit more tense. So, tell us a little bit about when you actually get your offer accepted. When does the negotiation start at that point?

David:
Now, once the offer is accepted, what that means is the buyer is now the only person that has the right to buy that house while it is under contract or while it is in escrow. So, a lot of the leverage shifts from the seller who had it previously to the buyer who has it now. Before the offer is accepted, the seller has all the leverage because they can tell everybody, “No.” They can counter. They can say, “I want you to sweeten the deal.” And you as the buyer don’t really have any other options, but give them what they want or move on and find another house. But once your offer is accepted, all that leverage shifts to you as the buyer. They can’t sell it to anybody else legally while the property is in escrow.
So, what typically happens is the more contingencies that you had in your offer, these are the inspection contingency, the appraisal contingency and the loan contingency, the more leverage that you have to put pressure on the seller to sweeten the deal or you’ll walk away and get your deposit back. And so, the longer that a buyer is in the escrow, the more likely that the seller is to give them what they’re asking for. And this is where the game starts to be played. Technically, if a buyer goes under contract with the seller and they haven’t sent their deposit in, there’s not really any recourse for the seller. Just get out of the contract right away and say, “You didn’t send your deposit in the three days that you were supposed to. I’m putting my house back on the market.”
But once the deposit has been put into the escrow, this is where the negotiations really start. It typically happens when the buyer orders inspections on the property. They get a full home inspection that looks at the condition of the windows, the roof, the electrical system, the plumbing system, the condition of the paint, the condition of the exterior, the yard, all of it. And that’s the first sign that the buyer says, “Hey, you got some problems with your house. I want a reduction in price or some credits or something to sweeten the deal if you want me to move forward.”

Rob:
All right. We’ve covered what we’re talking about when we say under contract as well as who holds the leverage during this phase. And we’re about to get into the nitty-gritty where we’re going to talk about the non-negotiables that every investor should know when reading a home inspection, plus the trick that you can use when you’re selling a property to regain leverage in the process, right after the break.
Welcome back everyone. I’m here with David Green and he is spilling all of the secrets on how you can get the most out of your deals by negotiating while under contract. So, this is somewhat the due diligence period here and it’s where you start actually finding out things about the house that you like or that you may not like so much. So, I imagine this is where you start opening up those negotiations and you mentioned the inspection. What are some of the reasons that a buyer may want to negotiate with the seller after the inspection is actually completed?

David:
Let’s say that you have some problems with plumbing. The property has some leaks that may be happening. It’s kind of like internal bleeding in a house. Well, water is very bad for homes. You have to be very careful about what happens with water. So, if you have a leaky roof, water can be coming through the roof and getting into the actual framing of the home or some of the wood that’s underneath the roof and it can start to rot. Maybe you have a leak in pipes behind a wall, and so you find that there’s been wood that’s been rotting and if it’s continued to happen, it could actually compromise the structure and the safety of the home itself. Water tends to breed mold and mildew, which can also spread and it can cause health issues or it can cause issues for the home.
When a buyer finds something like that, roof issues, plumbing leaks, unsafe electrical issues, foundational issues with the home, which every older home is going to have some degree of it, but if they’re significant, they’re going to be less inclined to want to buy the house because they know I’m going to have to make all those changes and fix it once I buy the house, which is going to cost me money. That’s typically when they come back to the seller and say, “I want you to give me money, fix these problems or reduce the price that I’m going to pay for this house in order to stick with the deal.”

Rob:
Sure. So, with inspection reports, they’re always written in a way that make the home seem catastrophically a failure in every capacity. You have to learn how to digest these things a little bit and read through them and understand what’s a big deal, what’s not a big deal. For me, I don’t sweat inspection reports the way I did at the beginning of my journey. I’m not saying I don’t read them, I just mean I don’t freak out first pass and I try to really digest the information. But in your eyes, for someone that really might be new to homeownership or home repairs or investing in flipping, what are some of the non-negotiables that a seller should fix and that a buyer should be pretty resolute on?

David:
Significant foundation problems that needs to be fixed either before the house closes or the sellers need to be giving some form of a credit that a buyer is willing to take on. The only exception to things like that is if you’re getting such a good deal on the house that the money to make these repairs is sort of already built into the offer that you wrote. Occasionally, you’ll see investors that understand the house has a lot of issues, so they write a really low offer and that discount is built into it. But if you’re paying fair market value for that house and there’s a big foundation problem, that’s something that the sellers are likely going to have to address, and you should insist on.
A roof that’s at the end of its useful life or near the end of its useful life, that’s a pretty expensive repair that you can’t avoid. You’re not able to get homeowner’s insurance if your roof is too old or if it’s in bad shape, and you’re going to need that in case your house burns down. It’s also going to lead to massively expensive problems if the roof fails itself. So that’s one that will almost always lead to sellers having to give something up. Unsafe electrical issues. Now these reports, like you said, Rob, they’re very scary. They put a skull and a little lightning bolt going through it and it’s like, oh, this is going to kill a member of my family. The home inspectors do make it seem as bad as possible because very similar to the dad that shows up and knocks on the wall goes, “Oh, that’s a problem right there.” It makes them feel important. Home inspectors like to do that too. They’re also concerned about if they miss something or they don’t disclose it to you in the most serious way possible. They don’t want to be sued by you.
So, they’re always going to err on the side of making it seem like a really big deal, which makes it hard for you to know as the buyer if it is a big deal or if it just appears that way. My advice is that buyers should get on the phone with the home inspector every time and say, “Hey, tell me about this problem that you marked here and is this something you see all the time? Is this rare? Would you be concerned if you were buying the house to get some more clarity?” So, electrical issues are definitely another big one. Plumbing leaks, roof, foundation, and then the last one would be significant dry rot.
So, I have seen some houses where dry rot is this fungus that gets into wood when the wood gets wet. If you don’t continually repaint your house, the paint actually protects the wood from the dry rot. It’s not just for cosmetic reasons. That rot will literally eat away at the wood and it can disappear. It’s a fungus that eats through the wood. So, you can have situations where the siding of your home disappears through this dry rot and that leaves the rest of the house that isn’t going to be protected from the elements exposed if it goes on too long without being corrected.

Rob:
Interesting. I’ve never considered dry rot being fungus, but that makes 1,000% sense. I like that you said that the inspector’s kind of like the dad, which makes me think if you ever have an inspector that shows up in New Balances and ankle socks, then you know you’re in good shape.

David:
The dad energy, yeah.

Rob:
That’s right. So, I agree with you. I think those are all really big ticket items. Another interesting one that will pop up on an inspection report are like termites. I just had this recently happen where they saw termite droppings in the attic and I was like, “All right, well, we have to extend a little bit and we have to get a termite inspection.” And it did turn out that we had termites in the attic and I negotiated that because I knew, I mean it’s a relatively small expense, it’s a three or $4,000 expense, but I was like, “Well, this is an objective problem with the house. I would like a seller concession.” And I was able to actually get that credited towards my closing costs.

David:
Now, those show up in a different type of inspection. So, when we say home inspection, it’s mostly the stuff I just mentioned. They’re going to test all your electrical outlets, they’re going to look for issues with the home. You also should order a pest inspection, which is where you’re going to look for things like termites. That’s typically where the dry rot that I mentioned is going to show up. If there’s any issues with rodents or scorpions or if you’ve got an infestation of birds, which can actually happen sometimes in properties, those are going to show up on your pest inspection and you made a great point there, Rob. Termites are going to have to be addressed. Really, after years of being an agent and now a broker, I tend to classify problems with the house into two categories.
You have categories that if left unchecked would continue to grow and get worse until they cannot be avoided. And then, you have things that went wrong with the house, but they don’t actually represent a problem that’s going to continue getting worse. So, a chip in tile, a cabinet board that’s loose, what else might you see? A TV mount that isn’t done correctly or linoleum that’s starting to peel up. That’s not something that’s going to continue to get worse and worse and worse, so it can be ignored. It shouldn’t really be a really big deal. You can fix that thing if you want to, but you don’t have to. There are other issues that will continue to get worse, and that’s stuff like the plumbing leaks, the termites. If you look at it from that lens, you’ll understand where you have leveraged to negotiate with the seller and where you don’t.

Rob:
Yeah. I will say I kind of have my own categories too, David. I have things that will cost more than $5,000 to fix or less than $5,000 to fix. And so, if I have a whole laundry list of things and I feel like I can get a handyman in to address 90% of the problems for under 5,000 bucks, I will just sort of ask for one concession. I’ll list out everything wrong and make it seem like it’s going to cost a lot more because it usually will if I did every single thing on that inspection report, but then I’ll say, Hey, but I’ll just take care of all of it myself for 5,000 bucks. And in most instances, I’ve always felt that me taking the onus of being the one to repair it, sort of makes the seller feel better. They’re like, “Okay, great. I don’t have to worry about doing all of this.” And I’m usually able to get concessions that way. Do you ever work that into your negotiation on who’s the one that’s actually doing the repairs?

David:
I made that mistake when I was a newer agent. We asked the seller to make repairs and it hardly ever goes well, and here’s why. The seller is probably going to be resentful that they have to do any of this work, and they often get offended when you say that there’s something wrong with their house, which is just like a normal thing, right? Take a newborn baby and say, “Yeah, it’s not really that cute.” Every mom’s going to get mad. That’s how the sellers are sort of looking at their house. So, they’re going to do the bare minimum work possible, and then the buyers were going to be expecting that that work was done through a reputable contractor or a licensed individual.
So, when they see that the work wasn’t done very well, they’re going to be upset. The seller was upset that they had to do the work at all. It never, ever, ever works out. So, we’ve moved away from saying that the work has to be done by the seller. The other issue that you have is the seller, if they’re in charge of doing the work, is in control of when the work gets done, not only how the work gets done. Well, what happens if it isn’t done by the time that the date of escrow is supposed to close. Now you’ve got an issue where the interest rates might have gone up. New loan docs have to be withdrawn, new property taxes have to be calculated. The seller’s angry because they thought that the house was going to close on that date and they would just get to the work later.
The buyer’s saying, “I’m not going to close on this house until the work’s done because how do I know it’s going to get done?” You have everybody mad at everybody else, which is what often makes deals blow up. It’s much better to have the seller say, “I will credit the buyer this much money towards their closing costs so that they can go make those repairs after the deal closes.”

Rob:
Sure, that makes sense. Yeah. I trusted a seller to fix a store problem at a property that I bought one time and they said that they fixed it and I didn’t do another source scope like a noob, and then about a week living into that property, ramen noodles started coming out of my bathtub along with other things, and I was like, “Oh.”

David:
I’ve heard this story, yeah.

Rob:
Yeah. I was like, I will not ever trust a seller to do major repairs like this again. So, we’re getting into this world of the inspection finds a lot of things that could be wrong with the house. Does the seller have to disclose any or all of these things if the buyer ultimately ends up pulling out after things are discovered on the inspection report?

David:
That’s a great question. The disclosure thing comes up a lot. So, let’s start with what a seller is required to disclose and then let’s talk about it if they have to disclose this stuff later. Most states have a requirement that a seller must disclose to a buyer any known defects with the property or some verbiage like that. So, if the seller knows that their roof leaks and they put a little bucket out to catch the drips like in the old cartoons. When they’re selling the house to the buyers, there’s an actual form where they have to write this in there. In California, we have a form and they have to disclose if they’ve ever had pets in the house, if they’ve ever known for sure that there was an electrical problem. If there’s any weird smells that are going on, if somebody’s died in the home in the last three years or seven years, there’s a lot of stuff a seller has to disclose.
But where it gets tricky is that the buyer would have to prove that the seller knew about the defect and didn’t disclose it. This always comes up after the house closes and there’s a dispute about the buyer finding that something was wrong that they weren’t told about. So, in this case, you saw for yourself that that house had termites, but the seller probably didn’t know that they had termites there. So, you can’t get mad that it wasn’t disclosed because the seller didn’t know that it was there to disclose. If you wanted to show that they were in breach of their duty in disclosing it, you have to prove in court that they knew about the case. You’d have to show, “Hey, Clark Pest Control went to the house on this date and told them they had termites and then they didn’t tell me about it.”
Now the interesting thing here is once you’ve had an inspection done on a house, your agent can send that inspection to their agent, which their agent now has to share it with them. They are now aware of all of these issues, which means that legally in almost every case, they do have to disclose this to the next buyer if they don’t sell to you. Now, does that always happen? I would say probably not. I think that a lot of sellers are willing to roll the dice and they’re not going to disclose the things to the buyers. It’s just bad practice because buyers are going to find out about this and it’s better that they find out about the flaws before they’re in escrow than after.
So, this does become a point of leverage for buyers where if you say, Hey, I paid all this money for these inspections, your house has these problems, you can kind of know that if the seller doesn’t address it with you, they’re going to have to address it with the next person.

Rob:
Yeah. Seller disclosures are hard to fill out. I filled one out recently and I was like, “I really don’t know the answer to any of these things.”

David:
You haven’t asked me this, but I will say if you’re selling your house, a better negotiation strategy is to give the buyers the disclosures before they go into contract for the home. When I’m taking a listing, my goal is to remove all the leverage that the buyer’s going to have. Just like when I’m representing a buyer, my goal is to give my buyer client as much leverage as possible. So, when I’m taking a listing, if we’re going to sell one of our houses, Rob, I would say, “Look, let’s disclose everything that we know is wrong with the house and let’s pay for a home inspection and let’s pay for a pest inspection and let’s pay for a roof inspection and let’s pay for a pool inspection. Let’s pay for every inspection that a guest could ever want. Let’s do it out of our own pocket and let’s give it to them before they write their offers.”
Because the idea is when you get several buyers that want to buy the house, they have to compete with each other to be the best offer, right? Well, if there’s no inspections that are given, they’re going to insist on contingencies in that contract to make sure that the house is in the shape that they want it to be before they move forward. But if you’re giving them those inspections, they don’t have the need to ask for an inspection contingency, right? I do this all the time when it’s my listing. I’ll come back to the buyer’s agent and say, “We’re not going to give you any period of time to do inspections because we’ve provided them all to you first.” Take your time, take as long as you want to read those things and don’t send your offer until you have and work into your offer whatever credits or whatever price reductions you want based on this.
Now, here’s the beauty in doing that. They really can’t do that. They can try to work into their offer what the discounts are they want based on those inspections, but if there’s five other people that are all trying to buy the property, they’re not competing with me, the seller, they’re competing with those four other people. So, whoever it is that writes the best offer is the one that’s going to get it, which means they’re not able to negotiate to get all those credits. If you skimp on those inspections, which is what most sellers want to do, and I just see this all the time with listing agents that don’t really lean on their clients to do it this way. Then the buyers, of course, they’re going to get these inspections.
And every buyer goes through a period when they want the house before it’s in contract, when they’re so excited and they want the house so bad and they write this really high offer. And then the minute it’s accepted, you get this buyer’s remorse. “What did I do? Why did I go that high? Am I crazy?” Your dad’s telling you that you’re dumb. Your mom’s saying, I think you wrote too much. All your friends are saying, “What? Are you sure?” And they go from, “I want it really bad” to “I don’t know if I did the right thing.” If you’re the seller, you don’t want the buyer receiving the news that the house has issues when they’re in that state of mind of, “I think I paid too much.” You want them to receive that news when they’re in that rose-colored glasses. Everything is wonderful. I want this a lot.
Basically, if you can provide them with all of the reports before they write the offer and then they don’t have contingencies in their deal, they have no reason to back out because they already had everything disclosed to them and they lost their negotiation leverage moving forward where they’re going to come after you for the $25,000 discount.

Rob:
Yeah, man, buyer’s remorse is real. I’m honestly surprised that I’ve gotten this far in real estate with the amount of buyer’s remorse that I have. I get buyer’s remorse at a restaurant when I order something that’s like $50 and then I eat it and I’m like, “Does this actually bring me the happiness that four separate Chipotle burritos would’ve brought me?” So, tensions get high when you’re buying a house.

David:
That’s such a good example though. When you’re at the restaurant and you’re looking at the menu and you’re looking at all the other happy people, you’re like, “Yeah, I’ll pay that. I’m at a restaurant. We’re having a good time, right?” You’re in a frame of mind where that $50 is kind of cheap. But then after you’ve eaten it, you’re like, “Man, I wish I could have that $50 back. Why did I do it?” That’s such a great way of putting it. You want the buyers of your deal to see all the worst parts of that property when they’re in the best state of mind, just like you want to ask Dad for that favor to do something when he’s in a really good mood.

Rob:
Genius. Yeah. This may have been the tip of the episode, man. Send the seller disclosures out before you get the offer accepted. DG, that is a brilliant move, my friend, and one that I know our listeners are going to benefit from. After the break, we’ll get into the smartest way to ask for any concessions, so stick with us.

David:
And welcome back. I’m here with good job Rob Abasolo, and we’re talking about How to Negotiate a Deal When You’re Under Contract, as well as how to get the most out of the process, whether in the buyers or the seller side of the table. BiggerPockets helping save and make you money no matter where you’re sitting.

Rob:
Really great. So, let’s move along here in the process and let’s just say negotiations happen, concessions are being made. What are some of the concessions a seller could from a technical standpoint offer in the negotiation process?

David:
Well, you have to understand that when a buyer is asking for something, they’re doing it through a certain form, request for repairs, I’m asking you to make these repairs. Or maybe they send an addendum that says, “You will give me this much of a credit and reduce the price by this much or I will back out of the deal.” That’s what’s actually being said here is the buyer isn’t just saying, “Hey, would you mind giving me a little something?” They’re saying, “I am not going to move forward with this deal unless you give me this discount or make these repairs or give me this credit or do something.” The seller then has the option of saying, “Well, I’m not going to give you all that, but I will give you this much,” and that’s where negotiation happens.
Or the seller can say, “Thank you, but no thank you. I will put my house back on the market and sell it to a different buyer. Please sign this form that says we are officially ending the escrow,” or the seller can agree with what the buyer’s asking for. That’s what’s really happening in the negotiations here. Now, the sellers don’t have much leverage. Really, their only option is, “I will not work with you and I’ll put my house back on the market.” Now, that’s not good. The sellers have their most leverage when their house first hits the market and everyone’s going to the open home and everybody sees it hit their inbox at the same time and everybody’s seeing the hot house on Zillow and everybody wants it. That’s when people are going to write their most competitive offer. They got to go put that thing back on the market.
Now they’ve been sitting there for 30 days, 45 days. It looks like old product. Buyers aren’t going to see it as often. It’s not all hitting their inbox the same way that it was when it was new. People are all looking at the new thing, which means that the longer that the escrow goes on, the more leverage that a buyer is going to have. The seller can basically say, to sum that up, “I will not give you any concessions. I’m putting the house back on the market. I will lower my price by X amount. I will give you this much of a credit towards your closing costs, or I will make these repairs myself.”

Rob:
Yeah, I mean, it kind of goes both ways because the leverage does exist in that the longer a home has been on the market, it does feel like the buyer has a little bit of leverage, but there are instances where you are in a very hot market or the deal is actually really, really good, and then there may actually be a buyer pool that’s pending, that’s got backup offers or an offer that they want to submit. And I’ve also been in that scenario too where I’m like, “Do this or I walk pal,” and then the seller’s super excited for me to walk because they’ve got two or three better offers than I offered. I feel like that usually happens, I don’t know, one out of four at a minimum, but sometimes half and half. So, I think you definitely want to tread lightly there. Out of the list that you just described, the no concessions, price reduction, seller repairs, credits. Is there one that a seller is more likely to do in any of those scenarios?

David:
Yeah. And it’s funny because to a seller, if they reduce the price of the home or they credit you money towards your closing costs, it’s pretty much the same thing. But sellers have egos and they don’t like to reduce the price. For whatever reason, the average seller, if they’re selling their house for a billion dollars, doesn’t want to sell it for $990,000. They’d rather give you $10,000 in closing cost credits. In fact, I’ve found they’d rather credit you $20,000 in credits, then knock 10 grand off the price. It’s this weird thing that goes on. So most of the time asking for a price reduction is less likely to be accepted by the seller, and it’s less beneficial to you as the buyer, especially when interest rates are low. So, if you knock 10 grand off the price and you’re putting 20% down on the house, basically all that means is that you’re going to borrow $8,000 less, which might mean that your mortgage is adjusted by 15 bucks or something, 20 bucks. It’s not that big of a deal. But getting $8,000 in your bank…

Rob:
That’s huge.

David:
Is big deal, right?

Rob:
Yeah.

David:
Ten thousand dollars that you’re getting to keep. You could take that $10,000 and redo your kitchen and make your house worth $40,000 more. That could be reserves that you could use to buy more real estate. That could be a down payment for the next property. There are all kinds of ways that you can use $10,000 to improve a property. So, I typically advise my clients, unless you’ve just got a ton of cash, which most people don’t, it’s harder to save up the capital. You’re better to ask for the credit than you are to ask for the price reduction.

Rob:
Well, I was just going to say, as investors, for me, it’s always important to have more cash in my pocket at the end of the thing because the less cash that you spend obviously is going to go a little bit more into your cash on cash or your ROI metrics.

David:
Great point. Yeah, your ROI improves when you put less money in the deal significantly, right? Now, you can use this principle when you’re writing offers on property also, which is what you and I did when we bought our Scottsdale property. If you tell the seller, “Hey, I know that you want X amount of money, but I’m going to offer you less,” they typically just get their feelings hurt and respond negatively. But if you say, “Hey, I’m going to give you what you want for the house or close to it, but I want a really big closing cost credit.” I don’t know why it doesn’t make any logical sense, but they are way more likely to accept that offer.
So, on the David Green team, we’ve made this routine. If the client says, “I really like the house, I’d pay $900,000 for that thing and I’d be happy.” I’m more likely to go to the seller and say, “Hey, we’ll pay $910,000 for your house with a $40,000 credit,” and they say yes to that more than they would say to the $900,000 offer. The other reason this benefits you as a buyer is that there’s going to be an appraisal that’s done on that house if you’re buying it with the loan, which is most of the time. So, if I’ve now said I’m going to pay you 910 and I want $40,000 in closing cost credits, that’s the equivalent of saying, I’ll pay 870, but the sellers won’t see it that way.
When the appraisal comes in for 900, I now have negotiation leverage to say, “Hey, I know we said 910 and 40k in closing cost credits, but I actually have to drop the 910 down to the 900. Sorry. You know how appraisals go.” And then sellers aren’t going to be thinking, well then take it out of your closing cost credit. It’s very rare that the listing agent puts two and two together. You get both. You end up getting the credit and you get the price reduction when you learn how to use these contingencies to negotiate your deal.

Rob:
Yeah. So, these are a lot of things to think through. So, I mean, who is this falling on more? Is it falling on the buyer? How vital is the real estate agent in this actual transaction when it comes to the negotiation?

David:
They’re crazy vital, bro, because the average person buying the home doesn’t know any of the stuff we’re talking about right now. To me, this is common sense. This is just like a basketball player dribbling. You just get a ball, you start to dribble it. As a person who’s been an agent for almost a decade, I see Neo in the matrix. I see all the code. I’m like, “We got an opportunity here. We should do it this way. Let’s write our offer and structure it like this because that’s going to give me negotiation two weeks down the road when we hit to this point.” Or, “Oh, you know what? We could also ask for a bigger closing cost credit and we could put that towards our loan and buy down the rate.” And now, instead of just getting a 10,000 price reduction, we buy our rate down, we can knock $200 off of our monthly allowance.
When you have an agent that understands the contract and understands the fundamentals like I’m talking about here, they’ll go to you and they’ll say, “Here’s how we should accomplish the goal and the way that makes the most sense to you,” and that’s why you should never be looking for the cheapest agent you can find. Whatever you think you saved on the commission or whatever maybe they credited to you of the commission is almost always significantly less than what they could have saved you in the deal itself. Most of them don’t know how the contract works, don’t understand leverage, don’t think about the psychological implications of the emotional state that someone’s in at the beginning of it versus where they will be in the middle versus where they’ll be at the end.

Rob:
Yeah, I think there’s a science to it or a strategy to it, and then there’s the art to it. And I think everyone tries the strategy, but with that experience and anecdotes to drive that strategy, it’s very rarely successful, which is why when I saw you working the magic and the deal that we did, it was so crazy because we were working with our realtor who was awesome, and he was kind of going off of your strategy, and then it actually worked. And then, somehow, we got not only a $200,000 price reduction, but we got a $75,000 credit, and I just really couldn’t believe, I mean, it just all kind of unfolded exactly how you laid it out at the very beginning, so it is kind of funny to see that you’re right. You do dance circles around people who just don’t have the experience doing this.
Last question here and then we can close out, David. I think all of this sounds good in theory, but can you just speak a little to how much the market dictates how your agent can negotiate for you? Because I imagine pretty much the market is sort of the ultimate decider or the gatekeeper of what actually goes through.

David:
It’s a great question, and here’s how I’m going to answer. I’m going to ask you a question. You play a little bit of poker, right, Rob?

Rob:
Yeah.

David:
Is a pair of eights a good hand?

Rob:
Yes. No, I don’t know. I would say, I mean, if I got it, I’d go for it. Maybe I’m not good at poker. Oh, I’m learning a lot about myself.

David:
What was the first word that you started to say when I asked the question?

Rob:
You know, I don’t remember. I’ll be honest.

David:
You were about to say it depends which is the right answer.

Rob:
Oh, okay. Good. Yes, it does depend.

David:
If you got a pair of eights, but you’re looking at a queen, a king, and a 10 that are sitting out there, you don’t feel so great about those eights, right? But if you’ve got a pair of eights and everything out there is less than an eight, you feel statistically like that’s a pretty good hand. Okay?

Rob:
Got it.

David:
The rules of poker don’t change, but how good of a hand you have, how much leverage you have really does depend on what you just said. In this case, the market is the other cards that are out there. If you’re in a situation where it’s a buyer’s market, houses are sitting on the market a long time, sellers are having a hard time selling. There’s more inventory available than there are buyers that want it. This is like 2009 through 2013, okay? It was largely a buyer’s market. All this stuff we’re talking about right now, you’re going to get a huge return on this knowledge. You’re going to use this stuff to your advantage. You’re going to do really well.
Now, what if you’re in a seller’s market? There are tons of buyers lined up for every single house, everybody’s paying over asking price. This information will save you some money, but it won’t save you as much because you can’t use the leverage as well. A lot of the time when we’re talking about how you go back to a seller and negotiate a reduction in price or a seller credit, well, I’m not making this up. In the last two years, it was such a hot market in California. If we went under contract on a house as a buyer, two, three weeks later when we go to ask for these reductions, the seller said, “Actually, I’ve already got backup offers that are higher than your offer. After we accepted your offer, new ones came in for $50,000 more, so we’re just going to go with that one if you try to twist our arm here and get a negotiation.”
That’s why, knowing the market is so important. When you’re in a market that favors you, this information is very, very valuable. When you’re in a market that doesn’t favor, you just can’t use it as easily.

Rob:
Well, I think that’s a mini masterclass, my friend, on How to Negotiate a Property When You’re Already Under Contract. I think so many people focus on negotiating beforehand that they forget that that’s really just the first 25% of the battle. Getting the offer accepted sometimes is by far the easiest part. It’s actually closing the deal at that point that makes it way harder. So, thanks for coming on and sharing all this.

David:
Yeah. This is the stuff that I teach agents all the time. I wrote three books for BiggerPockets through their publishing company, Sold, Skill, and Scale that basically spell this out for real estate agents. So, if you’re an agent listening to this and you want to get better at it, I’d highly recommend that you go pick up those books and let me leave you this one fact that is so important for agents to understand as well as the clients. Before a house goes into escrow, the seller has all the leverage. So, if you’re a buyer, you’re trying to eliminate your competition and get it to where it’s just you and the seller because then you’re going to get the leverage after it goes into escrow.
If you’re a seller, your goal is to eliminate as much of the leverage as the buyer’s going to have after it goes into escrow. That’s why you provide the inspection reports and you negotiate upfront what you’re going to do if the appraisal comes in low or if there’s a problem with the loan or how much the deposit is going to be understanding. Just that little fact will make it clear what the right moves are to make when you’re in the buyer’s seat or the seller seat.

Rob:
Couldn’t have said it better myself, my friend. You want to close this out, or do you want me to flop as they say in poker?

David:
I would love to see you close this out here since you don’t get the chance to very often.

Rob:
All right. Oh, okay. Well, all relevant to you can contact me and David. All of our stuff is down in the description, in the show notes down below, everybody. But thanks for coming on and sharing this man. This is Rob for David, the poker flop flopper having a solo out or the ending signoff, Flopper. Don’t laugh at me.

David:
You gave yourself the nickname, not me.

Rob:
I know. That’s done now. We’ll get it right on the next one, everyone.